THE HALF-LIFE
OF A
NUCLEAR
BATTERY
o0o
BY
PHILIP H. TALBERT
Astral Publishing, Inc.
THE HALF-LIFE OF A NUCLEAR BATTERY
Copyright © 2008
Philip H. Talbert
ALL RIGHTS RESERVED
No portion of this publication may be reproduced, stored in any electronic system, or transmitted in any form or by any means, electronic, mechanical, photocopy, recording, or otherwise without written permission from the author. Brief quotations may be used in literary reviews.
ISBN 978-0-615-23375-8
First Printing – December 2008
FOR INFORMATION CONTACT:
Astral Publishing, Inc.
3500 Galt Ocean Drive, Suite 1516
Fort Lauderdale, Florida 33308
Telephone 954-298-0906 – Fax 954-566-3795
Please visit our web site at
www.astralpublishing.org.
Printed in the USA
By Morris Publishing
3212 East Highway 30
Kearney, NE 68847
800-650-7888
Dedicated
to the memory of Paul M. Brown, a true genius,
whose life was cut far too short of his goal in his relentless
quest to make clean, cheap, safe and abundant energy
available
for all mankind.
ACKNOWLEDGMENTS
To my daughter Laurie and my son Philip, II for their steadfast encouragement and assistance to me in making this book a reality. They have endured the many hardships along with me that are depicted herein, but hopefully have gained more wisdom as a result of the journey.
CONTENTS
PREFACE
1. A FATEFUL MEETING
2. BACK TO THE FUTURE
3. PERIPHERAL VISION
4. NUCLEAR REACTION
5. THE FIRST HALF-LIFE
6. INTEREST MOUNTS
7. BRING ON THE REGULATORS
8. TEXAS STORMS
9. AFTER THE TEXAS STORMS
10. THE NAVY CALLS
11. OFF TO CANADA
12. SOME POSITIVE STEPS FORWARD
13. BAD NEW TRAVELS FASTER
THAN GOOD NEWS
14. PLAYING THE “HAND” YOU’RE DEALT
CONTENTS
15. GROWING PAINS
16. THE “HAND” THAT TURNED
INTO A FOOT
17. THE PLOT THICKENS
18. AFTER WE WERE BACK HANDED
19. PAUL’S OTHER HALF LIFE
20. THE NEXT HALF-LIFE
EPILOGUE
REFERENCE BIBLIOGRAPHY
THE HALF-LIFE
OF A NUCLEAR BATTERY
By Philip H. Talbert
“As we remain enslaved by the fossil fuel Masters,
and their political puppets.”
PREFACE
When I set out to write this book, my primary goal was to tell the readers about how certain powerful special interests, with their vast resources are able to use the government agencies as a personal tool for stifling or even snuffing out their potential competition – usually before it can even really get started. Moreover, I hoped to show how these special interests have been able to systematically, and rather successfully, discredit and suppress the development of important technology over the years, particularly as it relates to alternative energy. So far, it has been an effective system for the protection of their respective positions, and therefore, safeguarding the strangleholds they have in place in both the economic and political arena.
The farther I got in telling my story of the nuclear battery however, the more I realized that maybe this book could also serve as a primer for other would be entrepreneurs, thus providing what may be a few constructive and perhaps useful ideas, but more importantly, serve as a warning by pointing out the veritable “minefields” that may be encountered in undertaking any important project, particularly one of this magnitude. Clearly, it should at the very least, serve to depict examples of things not to do.
Under our capitalistic system it becomes possible for an inventor with an idea, together with creative entrepreneurs, to raise some capital and build a multimillion dollar company within a very short period of time; all in accordance with our American free enterprise system. However, a company and its project can also be destroyed even faster by certain governmental agencies, influenced and/or controlled by special interest groups. Thus we discover that the game is not always being played on a level playing field.
This book is not intended to be a thesis on “conspiracy theories,” but certainly based on these accounts, a very compelling argument could be made for their actual existence – even in this great country of ours.
The most important message that I hope to instill, is that we should never give up the quest for an alternate source of energy to reduce our existing dependence on fossil fuels, as our primary source of energy.
On the other hand, perhaps we must consider the statement by Amory B. Lovins, a college dropout variously described by his mentors as physicist, economist and genius: “If you ask me, it would be little short of disastrous for us to discover a source of clean, cheap, abundant energy because of what we would do with it.”
He might be right, but could we really be any worse off than our present slavery to the fossil fuel masters?
Maybe this book will prove to be useful in increasing the awareness to the truth that safe, cheap, clean and abundant energy does actually exist. We just haven’t been given access to it. The most disturbing fact is that this abundant energy has indeed, existed for millennia – we just have to hope and pray that it can not only be “rediscovered,” but allowed to be fully developed in the near future with minimum interference from the various special interest groups, and more importantly, from our own government.
––– One –––
A FATEFUL MEETING
Here I sat, on a crisp fall day in 1988, in a large meeting room at the Office of Naval Technology in Arlington, Virginia. Paul Brown, the inventor of the “Resonant Nuclear Battery,” and I were meeting to discuss our revolutionary technology relative to a proposal that had been submitted to them on our behalf, by the Naval Air Development Center in Warminster, Pennsylvania. The proposal was for 1.2 Million Dollars in funding for preliminary development of a “Resonant Nuclear Power Supply for Airborne ABW Sensors” (sona buoys). After about an hour of rather profound technical discussions, including numerous questions and answers between the various engineers, scientists and Paul – I noticed a bearded gentlemen in civilian clothes slip into the room, and take a seat in the back. As mentioned the room was filled with scientific types, some in uniform with lots of hash marks and some in civilian clothes. Everyone seemed most enthusiastic about what they were learning about our nuclear battery’s potential, as they discussed various applications and ramifications.
Finally, the bearded guy in the back spoke and the room got very quiet. He said “. . . I just have one question – if the Navy is going to put up all this money to fund the development of this thing, what do we get out of it?” For the first time that day, I decided it was my turn to speak. I said, “that’s real simple to answer sir, the Navy will get exclusivity to this technology for its use in Air Borne Sona Buoys, and related applications, which is what we have been discussing here.” He responded, gruffly . . . “that’s not good enough, we want full exclusive rights for all military applications.”
Little did I realize, that my next ‘knee-jerk’ response would turn out to be the primary catalyst to the long siege of various government intervention activities, in addition to some that we had already experienced, that could very well have spelled the doom for the development of an important technology that could revolutionize electrical power on the planet for decades to come.
Having just recently entered into an agreement with the Atomic Energy of Canada, to jointly develop our nuclear battery technology utilizing their massive recourses and facilities in Canada, we were probably a bit too cocky for our own good. Atomic Energy of Canada, through its subsidiary Crown Corporation called Radiochemical Company (later the name was changed to Nordian International, Inc.), was purported to be the largest producer of radio-isotopes in the world for industrial and medical uses. Dr. Anthony Egan, of Atomic Energy of Canada, a nuclear physicist, who had visited our lab in Portland, had been our primary contact. Through Dr. Egan, we had met with an entire cadre of nuclear physicists and nuclear engineers, who examined Paul’s theories, and concluded that they indeed wanted to be involved with us in the development of this exciting technology. The resulting development agreement between our Company and AEC was considered a tremendous step forward for us by all of our advisors.
Also, a few months before our meeting with the Navy, Paul and I had the pleasure of meeting with General Daniel O. Graham, former Military Advisor to President Reagan, and the head of “High Frontier,” to brief him and his group of experts on our technology. General Graham is referred to as the “Father of the Strategic Defense Initiative (SDI) Program,” which was also known, at that time, as “Star Wars.” I was rather surprised when General Graham, who was both keenly interested and very supportive of our nuclear battery technology, cautioned us by saying . . . “whatever you do, don’t let the military get control of this technology.” This was coming from the most patriotic man that I had ever met, who had spent most of his life in uniform, and had received some of the highest decorations our country bestows. Needless to say his statement had made a vivid impression on me!
So with General Graham’s words still “ringing in my ears,” I guess it wasn’t surprising that I responded to the bearded one by simply saying . . .“in no way will we give the Navy complete exclusivity for all military applications of our technology for only 1.2 Million Dollars.” I reminded him that we had not solicited the Navy for funding, quite the contrary, they had solicited us, and in fact, I proudly stated, that “we were about to start full scale development with the Canadian government, thank you. So we can just come back to see you after the technology is fully developed and discuss purchase orders with the Navy at that time.”
Suddenly, almost as if it was on cue, the fire alarm went off and we were all ordered to immediately start down the eight flights of stairs to evacuate the building for what turned out, of course, to be a false alarm. In all the confusion, we later discovered, the Navy had ended up with a lot of our proprietary documents that we had not intended for them to keep, and the meeting was not resumed. They told us that it would be rescheduled, but it never happened.
While we were milling around on the street, however, a Navy Captain who had been in the meeting came up to me and congratulated me, saying “We were doing the right thing in not selling out cheap to the Navy, at this point in time.” I am not too sure he was right, however, as well intentioned his remarks may have been!
The strangest part was, we never did see the bearded guy exit the building with everyone else. I never did find out who he was.
––– Two –––
BACK TO THE FUTURE
This odyssey started three years earlier, in October of 1985. I had just gotten home after a rather long day at the office when I received a telephone call from Bert Mitchell, a long time friend who lived in Boise, Idaho. He said, “Phil, you have got to get over here as soon as possible to meet a young genius by the name of Paul Brown. He is working on developing a revolutionary Nuclear Battery.”
I first met Bert Mitchell in Boise at least twenty years earlier when he was, at that time, the District Director of the Small Business Administration (SBA). I got to know Bert quite well through some financing arrangements with the SBA that we had helped put together for some of my clients in the Boise area. Later, after Bert left the SBA, he and I became involved together in a few real estate development projects, however it had been a few years since I had heard from him, before his call to me at my home.
My first reaction to Bert’s call was, “this is all I need right now, another so called genius with an alleged revolutionary idea.” This is the sort of thing I had been dealing with, on a daily basis, for the past two years since starting Peripheral Systems, Inc., in Portland, Oregon, to develop some technology that David Farnsworth had come up with. Farnsworth purported to be a Grand Nephew of the famous Philo T. Farnsworth, the inventor of electronic television.
We had just completed a successful, although modest Initial Public Offering (IPO) raising barely enough capital (about 2 Million Dollars) to move forward with certain research and development, and to begin the manufacturing of some products resulting from Farnsworth’s ideas for computer mass storage systems and specialized communication products, such as a small satellite TV receiving dish and some related technology. Like many so called electronic “geniuses,” we had difficulty getting Farnsworth to focus on completing any one project before he got carried away with something else, and our biggest problem at that time, was in actually getting any of these projects close to commercialization.
Being a small development stage company, we lacked both financial and human recourses, and since I had no meaningful background in electronics or scientific technology, I relied heavily on our Vice President, James Fanning who held a Doctorate degree in Physical and Nuclear Chemistry – and had taught at the University of Florida. Needless to say, Farnsworth was even more of a day to day frustration to Dr. Fanning than he was to me.
Even though Peripheral Systems had only fully developed a few of its communication products and had very minimal sales, based on expectations our stock was trading at more than double the initial offering price, even though it was not, at that time, listed on NASDAQ.
Since Bert Mitchell seemed convinced that I must be some kind of miracle worker, to have taken a company public just based primarily on some ideas, he would not let me off the hook until I agreed to come over to Boise and meet his nuclear battery genius.
When I first laid eyes on Paul Brown, I thought, “yep he fits the mold all right.” Paul, at that time had hair down to his shoulders and sported a fu Man-chu mustache, albeit very neatly groomed and clean looking. He told me that he had studied at the University of California, Berkley and that he had been working on his theory of converting the natural decay process of radio active material into electricity, without going through a conversion to heat and then to electricity process as compared to the systems which had been developed in the space program, which were very inefficient. He proceeded to carefully explain in such a manner that even I could sort of comprehend, that the existing nuclear battery technology built by NASA which he referred to as RTG (“Radioisotope Thermoelectric Generator”) worked on the principal of creating heat using nuclear material (Plutonium pellets), and converting the heat to electricity through thermocouples. It is very expensive to make as well as being only about 10% efficient, he said. It didn’t take long before I realized that I was not dealing with an ordinary genius. Paul was clearly from a different planet!
He went on to explain to me that his theory was to use nuclear material that is now considered a “waste product” from nuclear reactors, such as Strontium 90 which is abundantly available, and has been a real problem to dispose of because it has a relatively long half-life (about 30 years). However, his plan was to build an initial feasibility prototype device that would convert radioactive decay from a combination of Uranium, Thorium and Radium, since, he said this stuff was more readily accessible in the short run. He felt this would demonstrate the feasibility of capturing the electrons from the decay process electronically, and convert it directly into usable electricity, without first going through any heat process. He further stated that his theory was based on the application of magnetic resonance to accomplish this conversion, and that essentially the system was to consist of an L.C. Tank circuit comprised of an inductor and a capacitor. The oscillation of the L.C. tank circuit is driven by the emission from the radioactive material based on a phenomenon known as the “Beta Voltaic Effect.” I had learned just enough to be dangerous about magnetic resonance and L.C. tank circuits, by being around Farnsworth, so I tried to act like I actually knew what he was talking about!
Later in the day we met with Les Murray, a Patent Attorney that Paul had been working with. I learned that Murray was also a Nuclear Engineer who had spent considerable time teaching at the National Nuclear Laboratory at Idaho Falls. This was the lab that developed the world’s first nuclear reactor to generate electricity and which lit a small city in Idaho! It seems that Murray was in the process of preparing patent applications for the Resonant Nuclear Battery, and was so enthusiastic about the concept that he had been working with Paul on a pro bono basis apparently with the understanding that when Paul was able to get some backing, and form a Company, he was to receive a small stock interest for his fees.
Since I really didn’t know enough about nuclear physics to ask any intelligent questions of Les Murray, I resorted to asking obvious ones such as, “do you really feel that a patent can be obtained and if so how good would the patent be?” He patiently explained that he was seeking a Utilities Patent as opposed to a Design Patent, which was so prevalent in the technology field, at that time – the difference being that a Utilities Patent protects claims relating to the actual functions of the apparatus itself and cannot be so easily designed around. He went on to say that he believed, based upon his nuclear and legal expertise that such a patent should be issued by the Patent Office. He cautioned, however, that his only fear was that the Department of Defense (“DOD”) may try to “Classify” the technology and hold up or stop altogether, the patent process.
I ask him what, in his opinion, could be done to guard against such action, and he suggested that the best defense was to obtain as much publicity as possible in publications, and the media in order that the existence of the technology becomes known in the public domain, without, of course, disclosing the actual technical aspects of the invention.
So I was hooked, but I decided that it would probably not be prudent at that time to involve Paul’s idea and the potential technology as part of Peripheral Systems. My reasoning being that since we had just gone public this could convolute Peripheral’s development plans that were in process. Accordingly, I decided it was best to form a separate Corporation in Idaho called Nucell, Inc., with Paul, Bert and myself as principal shareholders, and we decided to raise the initial capital privately and separately from Peripheral.
In the following weeks we raised some capital for Nucell, largely from a few of the Board members and early investors in Peripheral, at least enough to get things started. We rented a small office/warehouse flex space in Boise, and began preparing a laboratory. We later applied for, and after jumping through a series of bureaucratic hoops, received a license from the State of Idaho to handle sealed radioactive source material. Thus, Paul began his work to construct a working feasibility bench model of the Resonant Nuclear Battery (“RNB”).
The original objective for the RNB project was to produce fairly significant amounts of electricity from the direct conversion of electrons from radioactive sources. The device was designed to include a special electrical circuit to produce controlled “electrical resonance,” thus creating a condition in which the electricity can flow more easily and increase the “efficiency” of the device.
The RNB concept would prove that having produced the electrical condition of resonance and a resultant measurable flow of electricity, the effect of exposing the circuit to a source of radiation would be observed to increase the current flow and thus provide an increased flow of usable electricity. At this early stage, we didn’t realize that since Paul Brown’s theories, relative to this technology, were not wholly orthodox, as far as the scientific establishment was concerned, it would become subject to considerable controversy in the months to come.
As mentioned earlier, the initial battery test model was to be fueled with a combination of Uranium, Thorium and Radium, all of which were quite readily available at that time.
Paul had been working with Paul Nonn, a Nuclear Engineer at the University of Wisconsin to fabricate, what he called the starter mechanism, and this seemed to be taking much longer than we had expected. Finally, Paul received the starter device and was ready to assemble the first feasibility prototype which was about the size of gallon paint can. After several weeks he was able to actually get it to generate electricity, but only by using what he called “forced oscillation.” In other words he had to have some power going into the device for it to work, however, it appeared, by actual measurement, to be generating considerably more power out than what was going in – but he was trying to get it started and function free of any external power input.
After almost a year of semi-successful, unsuccessful, and out and out failed bench models, I could see that Paul was getting rather frustrated. Some of the early units that were designed to produce up to 50 Kilo watts of power actually started, but actually worked too well. They generated far more electricity than Paul had calculated resulting in a virtual “meltdown” of the wires within the coil (not to be confused with a nuclear meltdown). Similar results were experienced in subsequent scaled down models. He had not, so far been able to solve the myriad of electronic problems. I began to realize that he was relying quite heavily for support in that area from Paul Nonn at the University of Wisconsin, and perhaps the distance factor was taking its toll. So I decided, somewhat reluctantly, to suggest that perhaps Farnsworth could help him solve some of these electronic problems, and to my surprise, Paul was very enthusiastic about this idea.
Peripheral had provided Farnsworth with a fully equipped mobile laboratory, (a converted motor home) for his testing procedures in the field, particularly involving the satellite micro wave receiver technology that we were developing. When I brought this project up to him he literally jumped at the opportunity. So he packed up some additional test equipment and headed the mobile lab to Boise to work with Paul in trying to help solve the electronics problems of the battery.
––– Three –––
PERIPHERAL VISION
A little background is in order as to the beginning of Peripheral Systems. In the summer of 1983 I ran into Frank Calise, a broker that I had worked with on a couple of corporate financing deals for clients, who had been telling me about David Farnsworth. Frank finally talked me into going with him to meet with Farnsworth and see the things he was working on in his garage, a classic setting to say the least. Farnsworth was a manic young man, who had all kinds of electronic devices set up in his garage, which he called his “laboratory.”
He purported to have developed a computer mass storage system that he claimed was “light years” ahead of the available technology at that time. It seems that he had formed a company called Computer Futures, Inc., and had raised some money with a few small private investors – but they had run out of money and couldn’t take it any further.
Since I wasn’t even sure exactly how to turn a computer on in those days, I called upon Dr. James Fanning asking him to accompany me on my next visit with Farnsworth. I told him that I needed his expertise to evaluate Farnsworth’s claims since I could see from the beginning that Farnsworth had a definite propensity to embellish and exaggerate things. Accordingly, I felt I could rely on Jim’s analysis and opinion of the technology.
I had become acquainted with Dr. Fanning during some recent involvement with a client financing activity and had become rather impressed with his vast scientific knowledge and his grasp of the latest technologies. Jim was a former Professor in the Department of Chemistry at the University of Florida where his work included computer-chemical instrumentation interfacing and software development. He had earned a BS degree in Chemistry from the University of Pennsylvania and a Ph.D. in Physical Chemistry from the University of Delaware.
To my surprise, after meeting at some length with Farnsworth, he seemed to be so convinced as to the potential of Dave’s technology that he wanted to be personally involved – both financially and scientifically.
So based upon his opinion and enthusiasm, I agreed to form Peripheral Systems, Inc., and we proceeded to raise some initial capital through private investors based primarily on the potential of these ideas. As mentioned we, of course, were relying quite heavily on Dr. Fanning’s direct involvement since I could see early on that dealing with Farnsworth was not going to be a “walk in the park.”
In due course, Peripheral, through an exchange of stock, acquired all of the rights to Farnsworth’s technology from the shareholders of Computer Futures, Inc. Knowing that we had to somehow raise more capital to really get anything started, I had been exploring several alternatives. During this period I had been in touch with Don Davis, a friend and associate of mine in Spokane, Washington who introduced me to Howard Crosby (a nephew of Bing Crosby). Howard was with a small investment banking firm, Richard Christman & Lavigne, Inc. in Spokane. He suggested, and later convinced me that they could underwrite a small Initial Public Offering (“IPO”)of shares of Peripheral Systems stock to raise about two million dollars for us.
After a couple of more meetings with Howard’s firm and based on their preliminary commitment, we decided to engage Stoel, Rives, Boley, Fraser & Wyse (the largest law firm in Portland at that time) to advise us and do the necessary securities legal work required for registration of an offering of our stock with the Securities and Exchange Commission (“SEC”).
Since this type of undertaking requires a good deal of time and expense in the preparation of the proper legal and accounting documents required, we had to first do a round of “Bridge Financing.” This involved bank loans personally guaranteed by myself and a few other members of our Board of Directors.
Finally we were able to complete the registration requirements of the SEC, and the offering became effective on June 20, 1985. Howard’s firm successfully sold our stock at 60 cents per share, raising just under two million dollars. After closing the offering they started trading our stock on the Spokane Stock Exchange (a penny stock exchange) and over the counter (pink sheets), and almost immediately the stock was trading at more than $1.00 per share.
––– Four –––
NUCLEAR REACTION
So, back to Nucell, having reluctantly made the decision to bring Farnsworth in to assist Paul, I had to figure out how to contend with two so called “geniuses” working together. It started out OK, but as time went on it turned out to be a real challenge.
After a few weeks together, however, they mutually decided to redesign the LC circuit and concentrate on building a much smaller vacuum type feasibility model that would be about the size of a one pound coffee can – that they estimated would produce approximately 100 watts of AC electrical current. By that time Paul had obtained some small isotopic sources, (about 1.5 curies of Strontium-90 ‘Sr90’ each) which he planned to use as the fuel in this small device.
At first, I was rather disappointed to hear about their decision to build something this small, due to my total lack of knowledge about things of this nature. I reasoned, “why would anyone be interested in a device that could only produce 100 watts of electricity.” That’s only enough power to light one normal light bulb! It didn’t take too long however, particularly after a few educational sessions with Jim Fanning, for me to realize – this would indeed, be considered a major breakthrough by those who actually did understand the scientific significance!
Paul’s early efforts to build a working model had also been frustrated by the inability to acquire suitable radioactive source material. As mentioned earlier, he was finally able to buy some small 1.5 curie (grams) of Strontium 90 (‘Sr90’) sources from an international company called Amersham. These sources came sealed in a small aluminum foil about the size of a quarter, and according to Paul, should be a suitable isotope for use as a fuel in the small vacuum model.
During the next few months, while Paul was working on developing this new feasibility prototype, I was extremely occupied with putting together a rather complex and very important acquisition for Peripheral of X-Ray, Inc., a 30 year old non-destructive testing laboratory, located in Seattle. X-Ray provided testing services primarily for the aeronautics, aerospace and petrochemical industries. This potential acquisition was brought to my attention by one of Howard Crosby’s associates. I was able to utilize some of my Employee Stock Ownership Plan (ESOP) expertise (having done this type of thing many times over the years for clients), to design and structure a Leveraged ESOP to facilitate this acquisition. With the able assistance and expertise of Ed Will, our CFO, we structured the acquisition in such a way that it afforded the present owners of X-Ray to realize well over a million dollars of cash in their pockets, together with a substantial number of shares in Peripheral Systems. We accomplished this by obtaining an ESOP bank loan – so it didn’t take any cash from Peripheral’s bank account.
Most important was that we were also able to retain the former owners, including Lee Connell who would continue as President to run the business as usual, as a majority owned subsidiary of Peripheral Systems.
This important acquisition then became the principal catalyst for qualifying Peripheral Systems for listing of its stock on NASDAQ, and shortly thereafter on the Pacific Stock Exchange. By that time our stock was trading in the range of between $2.00 and $3.00 with excellent volume, for a small public company.
Since perhaps a brief explanation of the ESOP concept is in order, I am including excerpts from my brochure entitled “Overview of ESOP Concept”:
THE LEVERAGED ESOP CONCEPT
What is an ESOP?
In its simplest form the Employee Stock Ownership Plan (ESOP) is an employee benefit plan that is tax qualified under Internal Revenue Code and Regulations much like profit sharing plans or 401(k) plans that most companies have. There are two important distinctions, however, that sets an ESOP apart from its other qualified plan counterparts. First an ESOP is designed to invest primarily in the stock of the sponsoring employer. Second, an ESOP may finance the purchase of such stock through a loan, either from the company itself, its shareholders, or from an independent financial institution. The ability to borrow to buy employer securities has increased the interest in ESOPs as a financing (leveraging) device, since such borrowings are prohibited to all other plans.
The design of each ESOP is indeed unique, in that it may, for example, be used as a tool for corporate finance or as an effective vehicle to assist business owners in providing a ready market for their ownership interests on the most favorable tax basis while at the same time benefiting employees. Thus developing a highly motivational “employee ownership culture” in which employees are more committed to greater performance. Following are a few of the myriad uses of ESOPs as a vehicle for:
A tax deferred sale of all or part of an owner’s interest, while still maintaining full corporate control;
Shifting ownership control to other family members and/or key employees;
Restructuring or Recapitalizing of a corporation;
Financing a Leveraged corporate buyout;
Acquisition of a target company:
An effective defense for corporate takeover;
Restructuring and increasing corporate debt-capacity.
While this list reveals a myriad of applications of ESOPs it also demonstrates their flexibility. The following will focus on the use of an ESOP in transferring ownership from a major shareholder to employees and the special tax incentives involved in such a transaction.
ESTABLISHING THE LEVERAGED ESOP
The process of creating a leveraged ESOP will most likely involve a series of steps depending upon the primary initial purpose of the ESOP. In focusing on the use of the ESOP in transferring ownership from a major shareholder, one of the first steps is to engage the services of a professional independent business appraiser to conduct a valuation of the company to determine the “fair market value” of the common stock.
Once the valuation is completed and the stock value has been agreed upon by the parties, the next step, with the help of qualified professional, is for the company to complete the necessary paperwork to establish the ESOP. This includes the creation of the ESOP Trust that will hold the stock for the benefit of the employees, that will be purchased from the selling shareholder(s).
THE TAX DEFERRED ROLLOVER
One of the most beneficial ESOP tax incentives created by Congress is the opportunity to “rollover” the proceeds that result from the sale of ones stock holdings (all or part) into “qualified Replacement Property” (QRP) and defer the capital gains tax until the subsequent sale of those replacement investments. Section 1042 of the Internal Revenue Code (the Code) provides for this special tax treatment, subject to a number of (not difficult) restrictions:
The tax free rollover treatment applies only to private companies and is not available if the stock sold to an ESOP is publicly traded on as established market.
The ESOP must own at least 30% of the outstanding stock of the company immediately after the initial sale from the selling shareholder.
Within a 15 month “window” beginning 3 months before the date of sale and ending 12 months after the date of sale, all or part of the proceeds received by the selling shareholder from the ESOP must be reinvested in “Qualified Replacement Property.”
The employer stock that the selling shareholder is selling to the ESOP must have been held for at least 3 years.
The stock that is sold to the ESOP can not be made up of shares resulting from compensatory stock options or other rights to acquire stock or a distribution from any other qualified Plan.
“Qualified Replacement Property” as defined in the Code generally means stocks, bonds or other Debt instruments issued by US operating companies, however Mutual funds and government securities do not qualify.
One thing to keep in mind is that the section 1042 transaction provides a tax deferral, not a complete avoidance. The gain that is deferred on the sale of stock to the ESOP will be subject to capital gains tax at such time as the replacement property is sold. However, if the taxpayer holds the replacement securities until death, there will be a step-up in basis in the securities equal to fair market value at the date of death. Accordingly, in such case the recognition of capital gain on his sale to the ESOP will not just have been deferred, but avoided permanently.
FINANCING THE PURCHASE OF STOCK
There are essentially two distinct ways in which ESOP loans can be structured. An ESOP loan can either be made directly to an ESOP Trust, or it can be extended to the ESOP company which in turn makes a “mirror” loan to the ESOP. Both types of loans entitle the employer to make tax deductible contributions to the ESOP for principal payments on the loan of up to 25% of eligible payroll. The interest payments are also deductible.
CONCLUSION
The fact that ESOPs can borrow money to purchase employer stock and because an ESOP is a qualified employee benefit plan under the Code, making the contributions to repay the loan tax deductible, it becomes a most attractive option for financing a stock acquisition. It enables the company to repay the loan, both principal and interest, with pretax dollars. In addition, the ESOP can generate the kind of motivational effects that many companies seek from an employee ownership strategy. A true win-win situation.
––– Five –––
THE FIRST HALF-LIFE
It was around the first of February, 1987 that I got the call from Paul. He was real excited as he told me that the “proof of feasibility” device was actually running, and generating 75 watts or better of AC electricity on a continuous basis. He urged me to get over to Boise right away. I grabbed Jim Fanning and called Floyd Hambleton, one of our Board Members and principal investors. I told him to meet us at Flightcraft Air Service, located on the Portland Airport, since I had arranged to rent a twin engine Beechcraft Baron from them. We were soon underway heading the Baron on course to Boise, which was about one hour and twenty minutes flying time from Portland.
After landing in Boise, we rented a car and hurried over the Nucell Lab. Sure enough, there it was, an unassuming looking device about the size of a 1 pound coffee can, sitting on a workbench peacefully lighting a florescent tube and a series of other small lights, while making a sort of buzzing sound. After we all stood gazing at this thing for several minutes, I raised the question of how does one determine exactly how many watts of power this thing is actually generating? Paul then hooked some wires to a spectrum analyzer, and some other meters that measured the amps and volts, which clearly allowed us to observe that indeed it was registering between 75 and 85 watts of alternating electrical current.
Paul, who was normally quite reserved, was so excited he could hardly talk while Farnsworth, who was normally excitable anyway, was jumping up and down waving his arms. Bert Mitchell, on the other hand, was virtually bouncing off the ceiling!
The following weeks were both exhilarating, and at the same time confusing. We had waited in anticipation of this working feasibility prototype for a long time, and in our exuberance perhaps we were a little over anxious to tell everyone about it. Besides, our Patent attorney Les Murray, had advised us to seek publicity in an effort to avoid having the technology classified by the Department of Defense. In hindsight though, our approach to this may have turned out to be costly.
The first mistake was made when, unbeknown to me, Bert Mitchell had called the local newspaper. He must have done this right after we headed back to Portland. The result was that the next day, February 7, 1987 a headline story by David Proctor about the Nuclear Battery, including a picture of Paul Brown with the device, was on the Front Page of The Idaho Statesman newspaper, which led to it also being on the newswire all over the country. This was, of course, a proud time for Paul. The headline read “Boisean invents nuclear battery. Device charges up new company; power expected to last 1,600 years.”
The article started out . . .
“On a workbench in a small garage-sized work space, fronted by a small office in a small office park on a side street in Boise, is a device slightly larger than a can of Campbell’s Chunky Soup. It produces 75 watts of alternating current. And it will keep on producing 75 watts for the next 1,600 years.”
Technically, the device is called a radioisotope-powered generator. In layman’s terms, it is a nuclear battery.
Invented by a 28-year old; whiz-kid physicist without a college degree, it produces electricity directly from decaying nuclear material.
There are no intermediate steps. No water is heated to produce steam to run a turbine to produce electricity.
It now powers a fluorescent light. Within 18 months, its inventor, Paul Brown, expects it to power a revolution in the world’s energy industry. He also expects it to power his bank account.
“I expect to be rich,” Paul said.
“We’ll be a multibillion-dollar company within a very, very short time,” said Bert Mitchell, president and chief executive officer of Nucell, Inc., the privately held company formed to develop and market Brown's invention. Brown is the major stockholder.
It was Mitchell who put together 14 backers, headed by company Chairman Phil Talbert an old friend of Mitchell’s who is also chairman and chief executive officer of Portland’s Peripheral Systems, Inc., a Portland based electronic firm. Talbert help raise the $500,000 Brown needed to develop his prototype.
Nucell itself is a two-man operation. There is not even a secretary. Brown is the brains behind the science. Mitchell, a former real estate developer, provides the business expertise.
By this summer, they expect to have 12 people, mostly engineers, on the payroll. By June 1988, when manufacturing is expected to begin, they predict they will have 400 employees.
There are still engineering and public relations obstacles to be overcome and $3 million to be raised to get the battery to the production stage. But after that, Boise may not be able to hold Nucell. They may take production to Portland.
The Nucell battery will be made in a variety of sizes and will provide AC power anywhere. Brown and Mitchell expect its first applications to be military and scientific – power for mobile radar units, the proposed Strategic Defense Initiative satellites and polar explorations.
Eventually, though, they expect to power everything from homes to irrigation pumps to automobiles to entire villages.
Already, power companies and overseas marketing corporations have expressed interest in the Nucell.
It will be guaranteed for 25 years; the wiring and internal parts should last 100 years. The power source will last virtually forever.
Currently, electricity from Idaho Power Co. sells for about 4.5 cents per kilowatt hour. In other areas, electricity costs 11 and 12 cents. Brown and Mitchell believe they can sell the Nucell for 5 cents per kilowatt hour.
The implications of what Brown has done are enormous.
If it works.
“It works,” Brown said, “I know it can’t miss,” Mitchell said.
“It sounds like they’ve got something.” John Sackett said when the process was described to him over the telephone. Sackett is a nuclear physicist at the Idaho Engineering Laboratory near Idaho Falls and president of the Idaho section of the American Nuclear Society.
There has been work in the field for several years, he said, but no breakthroughs like Brown’s. “I would be very interested to see how they did it.”
So would a lot of people. Brown and Mitchell refuse to go into detail about the process. They have filed for patents that their attorney, Les Murray, hopes will be granted within six to eight months.
Paul Nonn, a specialist in the nuclear engineering department at the University of Wisconsin-Madison and a Nucell consultant, described Brown’s work as “innovative” and “brilliant.”
“There’s nothing unknown about it,” he said. “The principles are classic physics. It’s just an untried application of it. There’s no precedent for what he’s done.”
Brown said he got the idea when he was 16. He was a freshman at the University of California at Berkeley studying the work of English physicist Ernest Rutherford, a turn-of-century pioneer in early nuclear physics.